Equity Analysis /

Pakistan E&Ps: 2QFY22 result previews

  • We expect Pakistan E&Ps to maintain near-record net profits in 2Q thanks to high oil prices and PKR devaluation

  • Overall production was broadly flat but some new additions helped counter depletion at mature fields

  • Our top picks in the space are POL and OGDC by virtue of their high dividend yield

Intermarket Securities
24 January 2022

Higher oil prices to keep earnings elevated

  • We estimate our E&P cluster to post near-record combined net profits of c.PKR57bn, up 69% yoy (flat qoq), thanks mostly to multiyear high crude oil prices and continuous PKR devaluation. The results should be accompanied by good payouts from all companies. 

  • Compared with the previous quarter, gas production was mostly flat (but up 4% for OGDC), while oil production fell 5% qoq on average due to depletion at major assets across our coverage. Notably, in the case of OGDC and PPL, recent field additions have countered depletion elsewhere.     

  • Higher oil prices have raised sector dividend yield, while there could be some positive triggers for capital upside during 2HFY22. All E&Ps have become active on exploration again. We understand that the government is in discussions with OGDC and PPL for a possible circular debt settlement.  

Strong profits to sustain in 2QFY22, though flat qoq

Cumulative net profits of IMS E&P Universe are expected nearly flat qoq at c.PKR57bn in 2QFY22 results (but up 69% yoy). Key themes remained the same as in the previous quarter. Global oil prices continued to rise, up 8% qoq to an average of US$80/bbl (the highest level since 1QFY15); and PKR devalued a further 3% during the quarter. Meanwhile, overall production was kept flat thanks to many new fields offsetting the decline in mature fields (especially in case of OGDC). Stock price performance remained lackluster, despite market conjecture that the government is in talks with E&Ps for a settlement of the outstanding circular debt. Our top picks in the space are POL (TP PKR500/sh) and OGDC (TP PKR165/sh) for their high dividend yields (without assuming any circular debt settlement) and meaningful production additions/catalysts in recent quarters.       

Exciting developments in production of late

Overall combined production is expected flat, which reflects that depletion across many fields was contained or countered by new fields added in the past year. Flat production was despite annual turnaround at some large fields such as Uch, and drag on oil production from low offtake by refineries amid weak Furnace oil consumption, while depletion at Nashpa, Tal and Adhi continued. Oil production of the three E&Ps in our coverage fell by an average 5% qoq. As for gas production, for PPL it was flat qoq, POL’s output fell 3% qoq, but that of OGDC rose 4% qoq. Notably OGDC added about seven new fields during FY21 and 1QFY22, which cumulatively contribute about PKR1.5/sh pa. in incremental earnings. Another recent discovery, Wali, is promising reserves as large as that of its largest oilfield, Nashpa (not yet added into production). For POL, the commencement of production from Mamikhel South will be a big boost (annualized EPS impact of c.PKR8-9); it is awaiting government nod for 2012 PP gas price.              

High DY makes our top picks

Our top picks in the space, POL and OGDC, are offering dividend yields of 17% and 10% respectively. Concerns on POL’s short reserves life, should Jhandial’s reserves be downgraded, may subside on success with exploration of KOT area in Tal block, while Mamikhel South and the potential addition of Mardankhel-4 should offer temporary relief. For OGDC and PPL, further clarity on government plans to settle the outstanding circular debt (nearly PKR700bn combined receivables) is paramount for ending the long spell of underperformance of the stocks. Nonetheless, recent cash injections in the Energy sector (mostly through IPPs) have considerably stalled the buildup, where both E&Ps are guiding for 80-90% recovery rates. This should mean more certain payouts and DY for E&Ps in the near future, in our view.